From: Walter T Gangl [WTGangl@armstrong.com]
Sent: Friday, December 19, 2003 12:15 PM
To: rule-comments@sec.gov
Subject: File No. S7-19-03
Nominating and Governance Committee
Armstrong Holdings, Inc.
c/o Walter T. Gangl, Deputy General Counsel,
Corporate, Governance & Assistant Secretary
2500 Columbia Avenue
Lancaster, PA 17603
December 12, 2003
Jonathan G. Katz, Secretary (via e-mail to rule-comments@sec.gov)
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0609
Re: File No. S7-19-03; Proposed Rule re Shareholder Proxy Access for
Director Nominations
Dear Secretary Katz:
This letter is submitted on behalf of the Nominating and Governance
Committee of Armstrong Holdings, Inc. As background, we point out that
Armstrong's business was founded in 1861, and our companies sell
flooring, ceiling and other building products around the world. Our
global business has approximately 15,700 employees, and annual sales in
excess of $3 billion. For many years, all but one of our parent company
directors has been an independent outsider. We started director
evaluations over a decade ago, and have vital board committees, each
comprised solely of independent outside directors. Since its founding,
the Company has had a strong culture of integrity, which was embodied in
the Armstrong Operating Principles (in abbreviated form: Respect,
Integrity, Courtesy & Service) adopted in 1961.
The SEC's objective in proposing this proxy access rule, and the rule
itself, have considerable merit. However, there are several threshold
issues that need to be addressed, which other parties in the corporate
community are ably bringing to the attention of the Commission. We are
mindful that the SEC's objective is to promote boards comprised of
diligent, independent, knowledgeable people working efficiently together,
and focused on shareholders' best interests. We urge the Commission to
carefully assess the rules that ultimately result from this process, to
be sure that they truly serve that objective.
We have three particular recommendations to make the Commission's
proposal more effective, meaningful and targeted to the problems it is
trying to address:
1. Require that shareholder nominees be submitted to the
nominating committee for consideration before the nominee can appear
in the proxy, and require disclosure of how the nominee measures up to
the company's own pre-existing independence standards and director
criteria.
2. Do not count social or political issues among the triggering
issues. It is poor public policy to promote the use of such proposals
in a forum where they do not belong.
3. Stop (and ultimately reverse) the erosion of broker voting
authority that disenfranchises shareholders and makes it difficult for
companies to gain quorums.
Most public companies already accept for consideration director
candidates suggested by shareholders. Unfortunately, few participants in
that process are satisfied with it. From companies' perspectives, most
of the candidates proposed have not had appropriate experience. The
proponents are unhappy because few have had any success through that
route, and see it as a waste of time. Fortunately, the new stock
exchange rules to strengthen nominating committees and the disclosures
required under the SEC's new rule about explaining nominating committee
functions should bring about improvements in this process.
The Commission's proxy access rule should be tailored to reinforce this
positive change, not undercut it. If serious candidates are
constructively suggested by shareholders, let the nominating committee do
its job before forcing parties into the costs and counter-productive
contention that come with a contested election.
The nominating committee's involvement will enhance the process and
promote candid dialog between companies and their shareholders. The
committee should have the opportunity to learn more about shareholder
candidates, assess whether they meet stricter independence standards and
general qualifications (such as age limits) their company may have
adopted, and how candidates fit relative to any skills or other criteria
the Committee may have established for incoming board members. (For
example, if a nominating committee is focused on recruiting a replacement
for a retiring audit committee chair, they will want to know what
qualifications in that area the shareholder candidate brings to the
table.)
If a contested election does result, where a company has previously
announced its own independence standards and director qualifications in
compliance with the Commission's new rule, a shareholder nominee should
be obliged to disclose how he or she measures up.
To the second point noted above, there is a risk of special interest
groups' abuse of the nomination process outlined in the Commission's
proposal to pursue agendas that have nothing to do with corporate
governance. That would not serve the interests of shareholders,
companies or our nation's economy.
To reduce this risk, social and political issues should not be the basis
for triggering shareholder nomination rights. These issues do not
concern corporate governance, and allowing them as triggers under the
proposed rule would politicize shareholder forums. That would allow
abuses that will undermine the Commission's corporate governance
objective.
Finally, meaningful operation of the SEC's proposal is predicated on the
assumption that "shareholder democracy" is otherwise a functional
reality. It is not. Many shares are not voted, and the numbers of
unvoted shares are increasing. Most shares are held in street name
through brokers or banks. Their customers, the beneficial holders, have
been comfortable with letting their broker or bank vote for them. That
process should not be eroded any further by restricting "broker" votes
for directors.
In fact, broker votes for all shareholder meeting agenda items should be
allowed. It is no less legitimate than letting mutual funds vote on
behalf of their customers or pension funds vote on behalf of their
beneficiaries. In fact, it is more legitimate because beneficial holders
can easily take matters in their own hands when they do not want to leave
the vote to their broker. The ultimate owners of shares held in mutual
funds and pension plans have no such means to make their voices heard on
corporate governance or any other shareholder issues.
Currently, brokers are not allowed to vote on most important issues, so
the outcome can rest in the hands of a minority of the shareholders. To
make the SEC's proposal work without giving undue weight to one segment
of the shareholders and pointlessly handicapping companies trying to
assemble quorums, as many shares as possible should be able to be
represented. As long as beneficial shareholders have the ability to
direct their vote as they see fit, they should also be free to delegate
that function to their broker when they prefer. Regulators should get
out of the business of dictating voting authorities in such private
relationships.
Yours truly,
Armstrong Holdings, Inc. Nominating and Governance Committee:
Judith R. Haberkorn, Chair
John A. Krol, Member
Ruth M. Owades, Member
Jerre L. Stead, Member
By: Walter T. Gangl, Deputy General Counsel
cc:
Michael D. Lockhart, Chairman and Chief Executive Officer
John N. Rigas, General Counsel